Colorado Commissioner Finds ASI Not Comparable to NCUSIF

DENVER – Colorado Financial Services Commissioner David Paul said that he could not approve state chartered credit unions’ use of private deposit insurance because it lacked comparability with the National Credit Union Share Insurance Fund in three areas. Colorado’s law requires credit unions to be insured by the NCUSIF or “comparable insurance approved by the commissioner,” Paul said. The Colorado commissioner focused on three areas of American Share Insurance coverage that he deemed not equivalent to the NCUSIF in a letter to Colorado credit unions, including 1) the ultimate backing of the fund; 2) diversification of risk geographically and with a single institution ($2.9 billion Patelco Credit Union); and 3) the provisions for involuntary termination of coverage. Paul’s six-page letter read, “In my opinion, each of these areas has enormous influence over the ultimate safety of our citizens’ funds entrusted to Colorado-chartered credit unions. And, in conducting this study and rendering this decision, the safety of our citizens’ money was my paramount concern.” The ultimate backing of the fund is the possibly most obvious difference. At year-end 2002, ASI had $157.7 million in equity available for losses or liquidity for member credit unions, comprising 1.47% of the company’s total insured savings, Paul’s letter cited. ASI’s contracts allows the company to assess its credit unions up to 3% of their assets to replenish reserves, though there is no Ohio statute limiting the amount. ASI also has two $40 million lines of credit for short term needs but maintains no reinsurance coverage on its primary insured accounts. According to Colorado’s Department of Insurance and Colorado Insurance Guaranty Association, ASI would not be covered by CIGA because it is a “financial guaranty” insurance excluded by law. On the other hand, the NCUSIF had total fund equity of $5.6 billion available as of year-end 2002 to absorb losses or supply liquidity to member credit unions, comprising 1.25% of total insured savings. Additionally, NCUA can assess premiums in an amount necessary to maintain the required equity level, has a line of credit of $100 million with the Treasury and can access NCUA’s Central Liquidity Facility. The CLF has agreements in place to borrow $500 million from Treasury and $5 billion from the Federal Financing Bank, according to Paul’s letter. “Stated simply, ASI has no access to a “deep pocket” such as a reinsurer, the state insurance guaranty fund in Colorado, or any government entity. The NCUSIF has the federal government’s backing.and I can find no restriction on the NCUA’s ability to go to Congress in a crisis and request that the backing be activated.” ASI President and CEO Dennis Adams said that if federal backing was a key factor in Commissioner Paul’s decision, then he made his decision back in the 1980s, not last month, and the “rest was added to make his letter look legitimate.” He argued that Paul “took the situation with the banks (from the 1980s) and extrapolated it into the credit unions.” Adams also laid blame with the state law, which requires credit unions to carry federal or “comparable” insurance. He stated that ultimately “No private insurance company has the ability to tax citizens.” Therefore, any insurer lacking the full faith and credit of the government would have to be found not “comparable,” which makes the Colorado law “a farce,” Adams said. He added that he does not believe the state legislature would write the law permitting the option of private insurance and then negate itself by making it impossible to meet the “comparable” requirement. The Colorado commissioner also pointed to the NCUSIF’s international reach, including all 50 states, Washington D.C., Puerto Rico, the Virgin Islands, and Guam. ASI, he said, served just 211 credit unions as of Sept. 30, 2002 in only seven states (Alabama, California, Idaho, Illinois, Indiana, Nevada, and Ohio). Between the limited geographic diversification and the concentration of insured shares in California (45.8% of ASI’s total insured savings) and particularly the $2.9 billion Patelco Credit Union (24.9%), Paul raised concerns over ASI’s ability to deal with local or regional economic circumstances. “It is my finding that the dramatic differences between ASI and the NCUSIF in terms of overall size, geographic diversification of risk, and single institutions concentration of risk are important indicators of the two insurance funds’ relative ability to weather a catastrophic loss-either a very large credit union failure or the failure of a significant number of institutions in a particular geographic area due to local or regional economic circumstances,” the letter read. The letter also compared each fund’s 10 largest credit unions, which Adams said is not the appropriate test for comparability. According to Paul’s letter, ASI’s 10 largest credit unions comprise 55.4% of the fund’s savings liability, as opposed to 9.8% for the NCUSIF. However, Adams said, “The commissioner missed the target.” Ten credit unions out of a couple hundred mean a lot more than 10 credit unions out of nearly 10,000, he suggested. ASI’s top 10 credit unions represent 4.8% of ASI-insured credit unions and 55.4% of the insured shares. Applying that top 4.8% of credit unions to the NCUSIF, Adams said, represents 475 credit unions and 59% of NCUSIF’s insured share base. Therefore, the NCUSIF actually has a greater concentration of risk than ASI when comparing each fund’s largest credit unions, he concluded. Additionally, Adams said that while ASI may insure a great percentage of its credit unions in California, 99% of those are CAMEL 1 or 2 credit unions, which he said NCUA could not claim. Paul’s final concern was with ASI’s terms of involuntary termination of insurance. While ASI can terminate coverage with just 30 days notice, according to the commissioner, the NCUSIF first provides the institution notice and then allows a hearing. If the NCUA Board decides to terminate coverage, the credit union then must give its members notice and the NCUSIF grandfathers coverage for a year for the amount covered at the time of termination less withdrawals. Paul said in a subsequent interview that this item represented a “substantial difference in consumer protection.” Adams pointed out that ASI, in 28 years of operation, has never terminated a credit union’s insurance without also merging or liquidating it, which the company told Paul. According to NCUA Public Affairs Officer Cherie Umbel, the agency’s general counsel, Bob Fenner, said that the NCUSIF has also never involuntarily terminated insurance. Under Ohio state law, Adams said, ASI cannot leave a credit union without insurance. He said the issue has never been raised, adding, “That’s kind of like wanting something on green paper and not blue paper. That’s how silly it is.” In fact, Adams said the 30-day notice is really intended to provide a regulator leverage to bring a credit union back to health or merge or liquidate it. He also said that many state laws, like Ohio, provide for a hearing on the termination of coverage. The NCUSIF is in a similar position, Umbel said. If the fund were to terminate insurance, NCUA, which administers the NCUSIF, would also pull the federal credit union’s charter. For a federally insured state chartered credit union though, its fate would be up to state law. Idaho is the only state that permits credit unions to operate without insurance. This potential scenario of possibly leaving a credit union without insurance led Adams to call the situation with federal insurance “a crisis waiting to happen” and the federal law “weak.” While Adams was discouraged by the Colorado commissioner’s findings, which he pointed out the states’ credit unions-not ASI-initiated, he expressed great disappointment in the manner in which the study was conducted. To start with, Adams said ASI was under the impression that the study would be conducted in two parts and that when the Colorado Division of Financial Services contacted them, ASI did not even realize it was being examined yet. Adams also said that no one from the Colorado regulators office made the trek out to Ohio to inspect ASI. In what Adams called a “desk review,” he said Colorado Financial Services Commissioner David Paul performed a cursory interrogation with ASI’s CFO and looked at the company’s financials. However, he contended that Paul “gave little or no credit” to ASI’s actuarials or how it mitigated risk. Of the entire report, Adams said, “I think that it was very biased, very distorted and misleading.” -